Online social networks are one of the success stories of the Internet era. Facebook Inc. has roughly 1.15 billion monthly active users and its market capitalization of $131 billion is close to double the valuation of Goldman Sachs and approximately equal to the valuation of BP.

An electronic billboard on the Thomson Reuters building welcomes Facebook, Inc. to the Nasdaq. Author: ProducerMatthew

An example of a direct value that users of online social networks receive is the recommendations of their friends such as Facebook “likes”. In order to get an understanding of this value, consider the following scenario. Suppose you become interested in living a healthier lifestyle and are searching for a book to educate yourself. While searching online you come across an advertisement for a particular book. At the same time a friend of yours, whom you know to be thoughtful and to make careful recommendations, advocates a different book on the same topic via your favourite social networking site. Which book would you rather buy?

Facebook introduced sponsored stories, a type of social advertising, in the fourth quarter of 2011. Since then its quarterly advertising revenue per monthly active user has grown 38% globally and around 63% for users in the U.S. and Canada. Compare the case of Facebook with that of Twitter Inc., another tremendously successful online social network platform currently making daily news due to its upcoming IPO. Surprisingly, Twitterhas no social advertising offering but instead allows only for conventional targeting based on the interests of users, for example. This gives rise to a good and a bad conclusion:

The bad conclusion is that while being one of the largest online social network platforms Twitter fails to capitalize on the power of the social aspect.

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About Manuel Mueller-Frank

Manuel Mueller-Frank is an assistant professor in the Department of Economics. He earned his Ph.D. and M.A. in economics at Northwestern University and holds an undergraduate degree in economics from the University of Bonn.